Widow of ex-San Francisco mayor spared $1.9 million tax bill

WASHINGTON — The U.S. Tax Court has shown mercy to the widow of the late San Francisco Mayor Joseph Alioto, a man who held many costly secrets.

In a notable legal victory, Kathleen Sullivan Alioto convinced a federal tax court judge that she shouldn't have to pay $1.9 million in taxes and penalties that her late husband owed.

"She would suffer economic hardship, because payment of the underlying liabilities would prevent her from paying reasonable basic living expenses," said U.S. Tax Court Judge Juan Vasquez

Vasquez's opinion, quietly released late last week, grants Alioto what's sometimes called "innocent spouse relief." It overturns the IRS's rejection of her pleas and reverses the judge's own earlier decision that he lacked jurisdiction over the case.

"I think he made the right decision," Karen L. Hawkins, Kathleen Sullivan Alioto's Oakland-based attorney, said Monday. "The fact pattern is completely in her favor."

The colorful mayor of San Francisco from 1968 to 1976, Joseph Alioto built his fortune and legal reputation representing Sacramento Valley rice growers and others. He ran the Rice Growers Association of California for many years and had holdings throughout the state, including a multimillion-dollar home in the Sierra Nevada foothills town of Auburn.

Alioto gained fame early, winning a 1957 Supreme Court case declaring that professional football — unlike baseball — was subject to federal antitrust laws. He successfully sued Look magazine over its unproven 1969 claims that he had organized-crime connections, but fell short of gaining the California Democratic gubernatorial nomination in 1974.

"Mrs. Alioto reasonably believed that Mayor Alioto was a man of wealth, a man who was on top of everything and a man in control," Vasquez noted.

The Aliotos married in February 1978. It was her first marriage, and his second. Vasquez characterized the marriage of Joseph and Kathleen Alioto, who was about 30 years younger than her husband, as "loving, supportive and harmonious."

The daughter of one-time Boston Patriots owner William H. Sullivan Jr., Kathleen Alioto was a former elementary-school teacher who went on to earn a doctorate in education and work for the City College of San Francisco.

After her husband died in January 1998, Kathleen Alioto began uncovering skeletons in the closet. She was confronted by state and federal tax authorities and myriad other creditors demanding $74 million.

"Mrs. Alioto was shocked, surprised and stunned to learn the amount of the creditors' claims against the estate," Vasquez said, adding, "Mayor Alioto virtually never discussed finances or business decisions with his children or Mrs. Alioto."

Kathleen Alioto, the judge noted, learned only after her husband's death that he'd used some $18 million over the course of their marriage to pay debts including those of his first wife, Angelina, and their children. She learned to her surprise that he'd agreed to indemnify Angelina against tax bills owed from the 1970s. And she learned that in 1997 Alioto had quietly withdrawn $110,000 from a $500,000 brokerage account opened in her name that same year.

"Mrs. Alioto did not discover until after her husband's death that he had withdrawn the funds," Vasquez noted.

When Kathleen Alioto sold the family's Auburn house for $2.4 million in 1999, the IRS received $1.8 million to settle taxes dating from the '70s. When Joseph Alioto won a big legal case in the mid-'90s, the IRS likewise used the money to pay earlier taxes. Consequently, the Alioto family tax returns fell short in 1995 and 1996.

Facing big tax bills for reasons outside her control, Kathleen Alioto first requested help under innocent-spouse rules in 1999. The IRS rejected her claim, leading her to Tax Court.

Vasquez likewise dismissed Alioto's case in September 2006, ruling that the court lacked jurisdiction for her kind of tax claim. Hawkins, the lawyer, had faced similar jurisdictional problems with other innocent-spouse cases, and that year she was already working with Sen. Dianne Feinstein, D-Calif., to change the law governing Tax Court jurisdiction. In December 2006, Congress passed Feinstein's innocent-spouse bill and set the stage for the Tax Court to reconsider cases such as Kathleen Alioto's.